Sunday, February 28, 2010

Poor Consumer Sentiment Tests Double-Dip RealityTodd M. Schoenberger~February 26, 2010This has not been a good week for U.S. consumers. First, we received the February consumer confidence reading, which detailed how Americans are feeling less and less secure about their personal financial situation. Then, we received data on the number of individuals filing for first-time unemployment benefits – a number that was much higher than expected.And, today, we see that the U.S. economy seems to have taken off during the fourth quarter of 2009, but preliminary findings detail that gross domestic product may have considerably slowed so far for 2010.In other words, the U.S. consumer is reverting back to an area that suggests the United States economy could be dancing with what economists refer to as a double-dip recession. Add in a report about how banks are lending at levels not seen in 70 years, and those words are turning into reality.“These numbers are not stabilizing,” says Kathy Boyle, president of Chapin Hill Advisors in New York, to CNBC. “We’re two-thirds of the way through the first quarter and the jobs numbers are worse…I just look at all the signs of these things and I don’t see us getting out of this.”According to CNBC, Boyle has held a bearish market position since the initial downturn in 2007, and thinks things could get even worse for the economy.“The news this week should push the [stock] market further down that it is,” Boyle says. “The fact that we’re not down 200 points means there’s still buying interest out there.”The second reading on fourth-quarter gross domestic product came in better than expected at 5.9%, from 5.7%. On the surface, the new data is promising, however, it also showed that final demand in the economy was benign, rising only 1.9% annualized. This figure was revised down from 2.2%. Excluding exports, final sales to U.S. purchasers rose at a 1.6% annual rate.Fortunately for the consumer, there is a chance at redemption when the University of Michigan releases its consumer sentiment survey. Wall Street consensus is looking for a number of 74, compared to 73.7 reported last month. Many traders are hoping for an eye-popping number because the markets will need additional octane if they are to bid higher.

“With a plethora of economic data, it’s really hard to say we’re going to have a good read of what the market looks like in the first hour of trade. We could have a tale of two markets here,” said Arthur Hogan, chief market analyst at Jefferies & Co. in New York, to Reuters.But the report did disappoint, coming in below expectations at 73.6 in February. With consumer sentiment and confidence lower, the outlook for March looks bleak, at best.“Consumers have been getting more impatient with the slow progress of the stimulus program, and confidence in the Obama administration’s economic policies has begun to want,” Richard Curtin, director of the University of Michigan survey, said in a statement, obtained by Reuters.

Doug Casey: A Major Turning PointInterviewed by Louis JamesL: Doug, a hot topic of conversation this week is the man who flew his airplane into the IRS building in Austin, Texas. What do you make of it? Is the guy a hero for the downtrodden taxpayer? Or a terrorist? Or just some lone lunatic?Doug: First, I’d say we have to define what terrorism is. The generally accepted definition being that it’s the use of violence to create fear in a society in order to induce political change. I don’t think that’s the case here. So I’d say this was just an angry man, acting as an individual, attacking those he saw as destroying his life. The fact of the matter is that it was an act of revenge, not terror.But according to the FBI, terrorism is the unlawful use of force or violence against persons or property, meant to intimidate or coerce a government or the civilian population as a means for achieving political or social goals. It’s to their advantage to see this as an act of domestic terrorism. It makes their jobs seem important and will result in more personnel to fill their gigantic new Homeland Security complex in DC, and more funding to look into Americans’ comings, goings, and thoughts.L: Heh – so if it’s lawful use of force to intimidate the population, it’s not terrorism.Doug: Of course; that’s a key word, completely unnecessary to the real definition of the word, and one that opens a real Pandora’s Box. From Big Brother’s point of view, it’s always “do as we say, not as we do.” Based on the FBI definition, state terrorism apparently isn’t terrorism, because it’s lawful.L: Okay, so, given that the explanation the guy left behind goes beyond simply saying “I’ve had enough” to stating that violence is now the only solution, and calling for revolution, I guess that makes him a terrorist, by the FBI’s definition.Doug: Well, I suppose. His call to violence seemed like an afterthought to me. In reality he’s just calling for the righting of egregious wrongs. However, it’s getting to the point in the U.S. that you have to be careful about even complaining, or you might be put on some kind of “watch list.” You actually better be careful about what you say, and how, and to whom. The walls have ears, as the Soviets, among others, used to say.The media has downplayed his letter as a “rant” or a “screed” penned by a lunatic, partially to be self-righteous and partially to discourage others from reading it and thinking about it. But it’s actually worth reading and thinking about. It’s not that often you get to read a suicide note written by what appeared to be quite an intelligent guy. His letter is a little disjointed, agitated, and a bit ungrammatical at times – after all, it is a suicide note – but it’s not at all irrational. And I suspect he put his finger on what is probably going on in the minds of a fair percentage of the population.You know the old saw people once used, but don’t anymore, as it’s become politically incorrect? Three guys are doing the same thing, and one says, “I’m a freedom fighter. You’re a rebel. He’s a terrorist.’” So, bandying these terms around makes conversation difficult. The FBI’s definition is self-serving and, in this case, serves – perhaps not accidentally – to obscure the truth of the matter.L: It was always darkly humorous to me that in the Reagan years, the same people the lawfully constituted government of Nicaragua called rebel guerillas, the U.S. called freedom fighters – and yet the U.S. helped Saddam Hussein put down rebellion when he was an ally. Not that I cared for the socialist government of Nicaragua. The point is that if “we” like them, their opponents are terrorists, and if “we” don’t like them, their opponents are freedom fighters. It’s so hypocritical.Doug: It’s perverse enough to be black comedy. I think this needs to be looked at from a personal point of view. Here was a man who was apparently just going about his business. He quite justifiably resented the government taking forty-plus percent of everything he produced. And worse than that, they were making it hard for him even to produce. They made his life miserable. He spent much of his time and money trying to fight within the system and got nowhere. Perhaps that was foolish of him, perhaps he should have just rolled over on his back and wet himself… just done what he was told and paid what he was told to. It’s the New American Way.On a moral plane, I think it’s important to remember that groups of people can have no rights that the individuals who compose the group don’t have. In other words, if an individual does not have a right to do something himself, then neither can he delegate that right to a politician, policeman, nor some other authority. If it’s not his to give, he can’t give it.If I don’t have the right to take money by force from my neighbor, I don’t gain that right by teaming up with others. A bunch of people voting for it doesn’t make it any more right. Suppose, for instance, a neighborhood voted to hire a motorcycle gang to defend it and “authorized” that gang to levy taxes by force, including on residents who didn’t want to go along with the plan. Most people would say that’s wrong. But somehow, if the government does exactly the same thing, people see it as okay.There’s no difference in this instance, morally, between the motorcycle gang and the government. Of course, this calls to question the legitimacy of the state itself, as an institution.L: Indeed. And I’d like to talk to you about your anarchist tendencies, but that’s a long topic, perhaps for another day.Doug: Okay, but one other thing I’d like to point out about this incident. It’s a clear sign of the direction in which warfare is going – we talked about this very sort of thing in our conversation on the military. Warfare is becoming what you might call “open source.” You no longer have to get an army together, teach them how to spit-shine boots, and attack another army. We’re approaching the end of direct conflict between standing armies. This trend has its roots at least as far back as the American Revolution, during which the British were outraged that the Americans wouldn’t stand and fight. They’d take potshots from behind trees and then run. They even shot officers – officers! – from hidden positions. Most ungentlemanly.Today fighters no longer need the aegis of a government. Instead, they organize loosely, for ideological or other reasons, and strive to sting with maximum effect, while presenting the smallest, least useful target for retaliation. They realize that with $100 they can cause a million dollars of damage. Wars are won on economics, in the long run. It is, for instance, quite stupid of the U.S. government to think that it can quash Al Qaida or the Taliban the way the Spanish took over the Aztec and Inca empires – by grabbing the guys at the top. There is no head to strike off.To head off flaring tempers and angry letters, let me make it very clear I am not defending these groups. I’m very much opposed to them. If either the Taliban or Al Qaida came to power where I live, no doubt I’d be among the first they’d want in front of the firing squad.But quashing individuals in such loosely organized groups, no matter how important they might be, doesn’t quash the reasons why such groups exist. It’s like whacking a hornet’s nest. Once you whack one, you don’t have just one hornet’s nest to deal with – now you have hundreds of completely unrelated hornets to deal with, all attacking you, because each sees you as his enemy.L: It occurs to me… the U.S. Army has, or had – I’m not sure if it’s current – a slogan: “An army of one.” The idea was that each U.S. soldier’s training would make him or her so capable of individual devastation, each one counted as an entire army.Doug: I remember that.L: Well, I wonder if it’s dawned on any of these geniuses in the Pentagon that the same is true – much more true – for their opponents…Doug: [Laughs]L: This incident in Austin is an example. This individual man decided to strike out at the U.S. government. Whether you approve or not, you have to admit that he created quite a stir, especially for a simple impromptu action. He made an army of one of himself – and since one individual can keep a secret, that sort of army is all but unstoppable.Doug: And it’s the way things are evolving all over the world. In previous times, you needed to organize a bunch of people to do serious damage. But with today’s – and especially tomorrow’s – technology, the individual is increasingly empowered. Let’s look at the big picture. This guy, Stack, was just one individual; but at this stage in the deepening crisis, there are a lot of people in similar circumstances. Millions of Americans have lived on maxed-out credit cards for years, and more than six million have lost their jobs since the current bout of crisis started. These people were already on the ragged edge. And the single largest expense in everyone’s life is the government.At least that’s true for productive people. In my own case, it costs me far more to support the U.S. government – which does absolutely no good for me whatsoever – than all the rest of my living expenses combined.L: Hm. Let’s see… My earnings are far more modest than yours, and I pay about three times more in taxes than on housing – and that includes two houses. I hadn’t thought of it, but I can’t imagine that food, utilities, and other bills would even match my housing expenses. So I guess that the direct cash cost of the U.S. government is also much more than all my other living expenses combined. And that’s not even counting the cost of regulation, indirect taxation through inflation of the money supply, etc., etc.Doug: I think there are millions of people out there like you, in that regard. But unlike you, most of them are also deeply in debt. A large number of them are close to the edge – and many could easily go over it, like this guy in Texas. There’s a rage out there, largely incoherent but real and powerful, and some are starting to strike out against this grasping octopus of a government that’s reaching its slimy tentacles into every aspect of their lives.It could be that we are reaching a critical mass of such people, the so-called “100th Monkey Effect.”L: It’s a question of how much of an anomaly this guy really is. I know that in the pro-gun community in the U.S., many people feel that the U.S. government lost any shred of moral legitimacy as a result of the Waco massacre. And some have wondered why people who are, by definition, armed and trained in the use of weapons, have not dropped the hammer on the government thugs that come to take their guns (in blatant violation of the Constitution and the human right of self defense).I suspect that the gilded cage most Americans live in has just been too comfortable for them to toss everything and turn violent. But that may be changing now, with more and more people being pushed over your ragged edge. Clearly, a guy who flies an airplane into a building, as in this Austin case, thinks he has nothing to lose. If a lot of people who think they have nothing to lose are pushed beyond the edge, things could get pretty ugly in the U.S. very quickly.Doug: Entirely possible. People forget that this type of thing has gone on in many countries, across history. As bad as the Greater Depression promises to be, anything is possible in the U.S. Americans don’t expect anything… weird… only because they’ve been uniquely blessed so far. It’s too early to say whether this act will spark other similar actions, but there’s already another story of a man who decided he’d had enough and wasn’t going to stand by while a bank seized his home. So he bulldozed it, while it was legally still his.L: I heard about that. Apparently the guy even found a source to pay off what was owed, but the bank refused because the man owed less than half of what the house was worth, so they could get more by foreclosing and selling the house.Doug: You know, when individuals start taking actions like this, it can change things. An army of one can sting, but what happens when you have 100,000 armies of one? Or a couple million? Just think of what would have happened back before WWII in Germany if each one of the millions of Jews and Gypsies and others the Nazis rounded up had fought back. The death camps were made possible by people who, although they had the capacity to act like wolves, acted like sheep. I’m not saying things will go that way in the U.S. But I do think there’s increasing resentment on the part of the average citizen against those who work for “The Man.”L: It comes back to hope. As long as people have a shred of hope that things might get better, or at least that they themselves might survive, most won’t embrace violence, because that sets you irrevocably on a path that can very easily get you killed.Doug: Although it’s true that nobody gets out of here alive, it’s natural to want to delay the eventuality as long as possible. But when you push a person far enough, he doesn’t care anymore – as recent events have shown.L: That’s pretty scary, Doug. Given how few Americans have savings – or even a work ethic – and given what we’ve been saying in this conversation, a protracted economic crisis seems like a recipe for violence in the U.S. What happens to a people who think that the Good Life is winning a lottery or suing McDonald’s for millions of dollars, when their jobs go away and don’t come back? And if, on top of that, the cost of government goes way up, to pay for all the so-called stimulus programs and social spending the government has on tap… Well, a lot of rage seems inevitable.Doug: We didn’t talk about this in our conversation on movies, but there was a movie made about 25 years ago, starring George C. Scott, called Rage . In it, the government killed the hero’s herd of animals in some sort of nerve gas experiment gone wrong. The hero decides to take the fight, as an individual, to the army base that did the test.The interesting question is: at what point do such actions reach a critical mass that renders a society non-viable? Although the average person doesn’t seem to have a clue what really caused this crisis, he deeply resents the bailouts and the worthless corporate “suits” who continue reaping multi-million-dollar bonuses. The system is rapidly losing legitimacy. What little is left of the free market will be blamed for what was caused by government intervention.That in mind, it’s worth noting that the government’s response to the current crisis has been to do more of the exact same things that caused the crisis. These buffoons are not just doing the wrong thing; they’re doing exactly the opposite of the right thing. Too much debt sent the economy into a tailspin, so the government throws more debt at it. They are printing more and more dollars, which is going to result in widespread capital destruction. And they are hiring swarms of bureaucrats to gum up everyone’s lives – while paying them about 60% more, on average, than people make in the private sector.L: And it just piles on – like in a Rugby game. Speaking of movies, there was a movie made back in the early ‘90s, called Falling Down .Doug: With Michael Douglas – I saw that.L: The protagonist is just some unemployed guy who gets pushed over the edge and “goes postal.” But what you’re saying is that there’s a pattern here, and that even though the actions are individual, a large wave of them is… predictable? Inevitable? You’re talking about blood in the streets, Doug – is that really where you think things are headed?Doug: I’m sorry to say it, but I find myself coming to the conclusion that we may well be reaching such a point. I don’t see any way out, not without a lot of pain and turmoil, at this point.L: That brings us to the concept of unintended consequences. Not least because the Austin case seems related to incidents in the book by John Ross by that name .Doug: Governments are constantly passing laws with certain stated objectives; the real objective, however, is to further the interests of the politicians behind them. Sometimes the stated objectives are met, sometimes not, but there are always unintended consequences, and they are usually unwelcome. In the case of the government meddling with the economy, including an increasingly rapacious tax code, the unintended consequences can include a violent backlash, like this one. We’re talking mostly about the U.S. here, but the problem is not limited to the U.S., by any means.In his book, John Ross explains how one thing can lead to another, and unintended consequences can get totally out of control – even to the point of revolution. Ross couldn’t get the book published – it was considered too much of a political hot potato. So he self-published, and it’s sold something like 75,000 copies in hardback, by word of mouth. That’s an incredibly large number, especially for a novel. And that tells us something about what a lot of people feel.L: One of the connections between that book – written in the mid-‘90s – and the Austin case is that Stack takes a pot-shot at the FAA in his note. Coincidentally, it’s excessive and abusive action by the FAA – an agency most Americans barely even know exists – that’s one of the sparks of revolution in the novel.Doug: The book was worth reading before and is all the more worth picking up now. And there’s another book that deals with this theme, by my friend Boston T. Party, a well-known gun-guru. It’s called Molon Labe , after what the Spartans told the Persians at Thermopylae. When the Persians demanded their arms, the Spartans responded: “Come and take them.” What’s particularly pertinent in that book is that individuals pushed too far by the government fight back – not to start a revolution, but as individuals responding to individual thugs, who just happen to work for the government.I hate to say it, and I’m not encouraging it, but the truth is that it’s entirely possible that this could happen, even in the United States.Another work of fiction that deals with this is, of course, V for Vendetta, which we spoke of in our conversation on movies. Incidentally, at about the time when that movie was supposed to be released in England, there was apparently an act of terrorism, and they decided to delay the release of the film.L: Another novel along these lines is Vin Suprynowicz’s The Black Arrow . Have you read it?Doug: No, but I know Vin is a solid libertarian thinker.L: So, government action may have unintended consequences. But even though they’re unintended, we can’t say the consequences are unimaginable, or even unpredictable, since all of these authors clearly saw the possibilities for the sort of thing that this Austin event might lead to.Doug: As angry individuals lash out, feeling a kind of inchoate rage, it’s entirely predictable that an increasing number of those targets are going to be in government. Back in the early ‘80s, when there was a serious tax revolt brewing, before the Reagan reforms, I was told a first-hand story about a guy who, when confronted by a threatening IRS agent, collared him and took his driver’s license. He looked at the address, then grabbed a tomahawk he happened to have, smashed it into his desk, and said: “Pal, it’s you and me. It’s not me and the government. I expect you to go away, or you’ll have to deal with me in a very personal manner.” Of course the agent could have reported the incident, but he figured it would be wiser to just close the case and go on to the next guy. Who needs the risk?L: That is very much the theme of books such as we’ve been talking about, especially Unintended Consequences, in which taxation and regulation become very difficult for the government to enforce, because individuals who’ve been pushed too far start fighting back. Once the badge and the uniform stop intimidating everyone into compliance, and especially once uniformed thugs face personal, physical danger, being a thug stops being much fun anymore.Doug: And very few of the people who wind up taking radical measures will actually be radicals, as they generally were in the ‘60s. Most will have no philosophical or theoretical basis for their actions; they won’t think of themselves as revolutionaries. But a lot of these ordinary Joes will act. And if they act in large numbers, it could turn into a major social upheaval. Could we be getting to a tipping point? I don’t know, but there are straws in the wind.Another book on this subject is a rather hefty new one by Jim Davidson – not James Dale Davidson, but the other James Davidson who deals in similar subject matter – called, Being Sovereign . Unlike the others, it’s non-fiction and runs to more than 600 pages, with a lot of very cogent material related to what we’re talking about. It’s quite eclectic, well researched, and full of interesting gems of data. I wonder if the memes in books like these will start spreading through society more, now that the economy is on the rocks – now that the gilded cage you mentioned is no longer so comfortable.L: Could be… such books would have appealed only to anti-government types before, but now, with fear and anger sweeping through the population, who knows if such seeds won’t be much more widely dispersed?Doug: I don’t know – but it’s as interesting as it is horrifying to watch the slow-motion train wreck of the U.S. and global economies continuing.L: Okay, Sunshine. Investment implications?Doug: I would have to say that, generally, they’re not very good. At least not for the kind of stuff your broker at Merrill is told to recommend.L: [Laughs] I think I’ve heard this song before… But can you be more specific?Doug: Well, I sure wouldn’t want to own any government bonds…L: [Laughs]Doug: [Chuckles] No bonds. And owning the government’s currency is going to be an extremely bad idea when inflation gets really bad – which it will do. If they wind up destroying the dollar, we’re in for really serious trouble – which looks like exactly what’s going to happen. And I don’t think people are going to panic out of greenbacks and into the stock market, not when corporate America is looking so shaky.L: Don’t hold your punches, Doug...Doug: I won’t. I think we’re on the ragged edge, and this Austin thing is a clear warning shot across the bow. It’s absolutely time to start rigging for stormy weather, if you haven’t already.L: Which leads us to your mantra of diversifying one’s assets, and entire life, out of a single political jurisdiction, especially the U.S.Doug: For openers. And if you don’t have a significant part of your assets, wherever you are, in real money – that’s to say, gold – you’re putting your neck on the block. Real estate is going to get taxed to death, paper currencies are circling faster and faster down the drain, government debt is a joke. This is a really, really serious set of circumstances that’s building up.People need to start thinking in terms of a major turning point approaching.I won’t try to predict all the details, but I will say you better prepare for big changes over the next decade, or you will get run over by events.L: Got it. Note to self: avoid becoming roadkill. I guess you’ll have more specifics in future editions of The Casey Report?Doug: Yes. I’m working on an article on China for the next issue.L: Can you give us a sneak preview? Are you bullish or bearish on China?Doug: I’ve been a bull on China and the Orient for many years, but times have changed. China could be in even bigger trouble than the U.S. The problems in Greece are going to spread; I’ve been predicting the euro was going to disintegrate for some time. What’s going on is a worldwide phenomenon.L: Well, that sounds pretty grim. But it is what it is. It may seem pretty extreme to think about, let alone plan for, the U.S. busting apart at the seams, but if this Austin thing – and the guy who bulldozed his house – are the leading edge of a wave of action and not just isolated incidents, it would be stupid, by your definition, not to think and plan.Doug: It always pays to plan for the worst while you hope for the best.There are times in history when sweeping social changes seem to come out of nowhere – to most people. But we can clearly see signs of this one coming, and there’s still time for people to get their own houses in order. Get out of debt. Accumulate capital. Protect yourself from currency destruction with gold. Diversify your assets across political jurisdictions. All the things we’ve talked about.L: Okay Doug. Thanks for another interesting, if not exactly cheerful, conversation.

Soros doubles investment in goldUS billionaire George Soros has more than doubled his investment in gold, despite calling it the "ultimate bubble" just weeks ago.Mr Soros' investment vehicle Soros Fund Management increased its holding in SPDR Gold Trust to 6.2 million shares, worth $663m (£425m) at the end of 2009.It had held 2.5 million shares at the end of the third quarter of 2009.The gold price hit a record high of $1,226.56 an ounce in December, but has since fallen back to about $1,100.Mr Soros himself has suggested that gold may not be a good investment.At the World Economic Forum in Davos last month, he said: "The ultimate asset bubble is gold." However, he did not say whether he was investing in the precious metal.But he also said that when he sees a bubble, "I rush out and buy".Mark Heyhoe, senior mining analyst at Westhouse Securities, said: "He has previously said that gold is the ultimate hedge against inflation - if you think inflation's going to rise, then I'm not surprised he bought into gold."A lot of people were starting to look at gold, and a lot of people follow what he does," he added. "But you need to buy a lot of gold to shift the price."As well as raising its stake in SPDR, Soros Fund Management also increased its holding in Canadian gold producer Yamana Gold.The company also bought more shares in seed producer Monsanto, Brazilian oil producer Petrobras, and Wall Street bank Citigroup.

Nearly 20 percent of the U.S. workforce lacked adequate employment in January and struggled to make ends meet with reduced resources and bleak job prospects, according to a Gallup poll released Tuesday.In findings that appear to paint a darker employment picture than official U.S. data, Gallup estimated that about 30 million Americans are underemployed, meaning either jobless or able to find only part-time work.Underemployed people spent 36 percent less on household purchases than their fully employed neighbors in January, while six out of 10 were not hopeful about their chances of finding adequate work in the coming month, the poll said.Gallup surveyed more than 20,000 U.S. adults from Jan. 2 to 31. The results have a 1 percentage point margin of error.The poll comes at a time when voter anger over the slow economic recovery is running high and President Barack Obama's hopes of boosting employment through government programs have been frustrated by partisan rancor in Congress.The U.S. unemployment rate fell to 9.7 percent in January but remains near record highs.Gallup found that underemployed Americans were more likely to have a favorable view of Obama, with 55 percent approving of his performance as president against 49 percent of the public.The poll's estimate of U.S. underemployment is higher than official statistics. The Labor Department says 16.5 percent of American workers were without employment or worked part-time for economic reasons in January against Gallup's 19.9 percent.A Labor Department official said the government rate may be lower because it factors out temporary seasonal changes in employment to better reflect the underlying economy.Copyright 2010 Reuters. Click for restrictions.

International Monetary Fund presses for authority to become the Federal Reserve of the world. The plan is to tie all the world's fiat currencies together so that, when one country gets deeper in debt than the others, the IMF can rush money from frugal countries to the reckless ones. Yes, that will do it!

IMF wants new power to supervise global financial systemFri Feb 26, 11:44 am ETWASHINGTON (AFP) – The International Monetary Fund wants new authority to supervise the global financial system, IMF chief Dominique Strauss-Kahn said Friday.Strauss-Kahn, in a speech in Washington, said the IMF needed to update its mandate as the global economy emerges from the worst recession in decades."We must build on this positive momentum: to transform the Fund into an institution even better equipped to meet the challenges of the post-crisis era," the IMF managing director told a meeting of the Bretton Woods Committee."There may be a need for a clearer mandate to pursue risks to global economic and -- I stress -- financial stability," he said, according to the prepared text."In particular, we are floating the idea of a new multilateral surveillance procedure. This would allow -- indeed require -- the Fund to assess the broader and systemic effects of country-level policies, and the associated risks, in a fundamentally different way."The 186-nation IMF currently is responsible for economic surveillance country by country, as well as developments for developments relating to the global economy as a whole, he said, "but in practice, the bulk of our efforts have been at the country level.""One result of this has been that we have not paid enough attention to the linkages and spillovers between economies -- including those that transmit through the arteries of the global financial system."The IMF chief also called for improved emergency response authority to financial crises.He recalled that in the global economic crisis, key emerging market economies seeking financial lifelines had not turned to the Fund as the "first responder," but instead approached the US Federal Reserve and other central banks."But what assurances do we have that they would be willing and able to provide such liquidity support in the future? We should not take this support for granted," he said."For this reason, it is critical that a multilateral institution be ready to answer the call. In this context, we are currently exploring various options -- including for short-term, multi-country credit lines that the Fund might extend in a systemic crisis."He said an increase of more than 850 billion dollars to the Fund's resources over the past year "should be sufficient to meet demand in the coming period."

Stocks Waft Higher, Oblivious to Realityby Rick Ackerman on February 25, 2010Stocks are in a warp now, moving in a parallel universe with no apparent connection to the observable world. The worst housing news in nearly 50 years pushed shares lower for a relative blink of an eye yesterday, then it was back to the races after Helicopter Ben affirmed for the umpteenth time that the Fed would not be tightening any time soon. Recall that it was just a week ago that the Fed announced it would raise the discount rate by half, to 0.75 percent. Even though this administered rate has become largely irrelevant to bank borrowing, the markets reacted as though the announcement had been momentous. The dollar soared, gold fell, and the unbiased observer might have concluded that something important had occurred. In fact, nothing of significance had changed. That’s because banks that face short-term stresses neeed not borrow directly from the Fed; instead, they borrow “excess reserves” from each other at the federal funds rate – the rate the Fed conspicuously left unchanged last week at 0.25 percent.Wall Street has been assured of easy money for so long, and so many times, that one might have expected Bernanke’s latest re-assurance to have had no impact whatsoever. But the fact that it moved the markets higher does not necessarily mean traders thought there was anything new or significant in the Fed chairman’s speech. No, they bought stocks simply because they believed that’s what all the other traders would do. It therefore wasn’t the speech itself that caused stocks to rally, but rather the fear of being left in the dust when others reacted. And because there was no way to construe Bernanke’s message as bearish, the only option was to go with the flow and buy stocks.Diabolical MachinesWe use that word “flow” euphemistically, by the way, since shares are increasingly being driven up, down and sideways by computers imbued with diabolical cunning to do battle with each other. Do you remember the fearsome little creature that burst from the crew member’s chest in “Alien”? That critter was a good analog for the kind of primeval thought process it takes to succeed in the algorithmic trading world. The cutting edge these days is high-frequency trading, a good description of which was provided in the Rick’s Picks chat room yesterday by a trader who evidently knows what he’s up against: “This is done by the big boys, mostly banks that have high-speed computers co-located at the exchange (for the speediest nano-second execution) where they can read your orders in less than microseconds, take them from you and sell them to another bidder with the best spread before your broker can give you a read-back of your execution. They can read your stops, and when there are enough to justify a move, they will quickly buy up to them at millisecond speed in 100-share lots to spring your stops selling their accumulated inventory into them to make the fastest money you’ve ever seen. The SEC justifies all of this as ‘adding liquidity.’ Feeling ripped off yet?”When it takes that much sophistication and cleverness for Goldman Sachs, J.P. Morgan and a few others to squeeze the last few billion dollars worth of “vig” from the world’s stock exchanges, the death of the game itself cannot be far off.

“I think we’re on the ragged edge, and this Austin thing is a clear warning shot across the bow,” says Doug Casey, reflecting on last week’s aerial suicide attack on a federal building in Texas housing IRS offices.“When individuals start taking actions like this, it can change things. An army of one can sting, but what happens when you have 100,000 armies of one? Or a couple million? Just think of what would have happened back before World War II in Germany if each one of the millions of Jews and Gypsies and others the Nazis rounded up had fought back. The death camps were made possible by people who, although they had the capacity to act like wolves, acted like sheep.“I’m not saying things will go that way in the U.S. But I do think there’s increasing resentment on the part of the average citizen against those who work for ‘The Man.’”

China has just postponed several military “exchanges” between Beijing and Washington -- visits by high-level officials and such. It’s the first real, tangible retaliation for the U.S. sale of $6.4 billion of military gear to Taiwan.~Rumor has it China will buy all 191.3 tons of gold the International Monetary Fund said last week it would put on the open market. So far, only Russian news agencies are reporting this; it’s yet to be confirmed by Western sources.We take note of these developments with a couple of looming deadlines in mind…· Next month, the Pentagon issues its annual assessment of China’s military. It usually has alarmist language, and Beijing usually issues angry replies, but most of the time, it’s just theater. This time? We’ll see…· April opens the official window in which the Treasury Department could label China a “currency manipulator.” We’re hearing buzz from Washington that the Obama administration is keen to boost jobs by boosting exports -- which means a weaker dollar in general, and a weaker dollar versus the yuan in particular.

But we get occaisional emails here at Sound Of Cannons and this one is from a reader familair with life in China:

. “What people fail to grasp,” this individual writes, “is this place is much more capitalist than the States now:· No capital gains tax

· No property tax

· No local or state taxes

· A reasonable 35% tax rate for the highest earners

· Corporate tax rates of zero percent for 3 years and 15% per year after that.“Also, most importantly, it’s not a casino economy like the States. China will sell 30% more vehicles this year than in the U.S. 93% of those vehicles will be purchased cash upfront.“For a home loan, you need 30% down. As a private business, to get a loan you have to put up the assets of the company, i.e., plant and equipment. There are no leverage games here.“It's a one-party state, but at least it is focused on its own people. We have a two-party system that has sold us down the river. All the Asian Tiger economies needed a strong central government to launch themselves out of poverty. Not a good system for our culture, but it works for them.“High-speed train systems going on line, 50 new airports in that last five years -- you must see this place to believe it.”

Thursday, February 25, 2010

As I sit to write to you on a Thursday, I feel at a double disadvantage. Some weeks are more “interesting” than others, and this may well be one of them. Given the backdrop, there could be some wild new headline roiling the world by the time you read this.The second disadvantage is a feeling of mental exhaustion. On the whole, the past few weeks have been nuttier than any we’ve seen since the Lehman/AIG days of Fall 2008.Thanks to its stark simplicity, the above chart from Dylan Grice at Societe Generale cuts through the clutter. It shows the difference between “official” net debt and total liabilities for a number of Western governments.The red bar is the official debt (shown as a percentage of GDP). The gray bar is what you get when all the “off-balance sheet” stuff is thrown in. Our governments are lumbering dinosaurs, and the meteor of sovereign debt risk is coming.

China's move to reduce its holding of US debt is likely to continue in the long term while the "euro scare" may last a while, legendary investor Jim Rogers told CNBC.com Wednesday.On Tuesday, government figures showed that foreign demand for Treasurys fell by the largest amount on record in December.China cut its holdings by $34.2 billion to $755.4 billion, losing the top spot in terms of foreign ownership of Treasurys to Japan.Japan also cut exposure, cutting ownership of Treasurys by $11.5 billion to $768.8 billion, a much slower pace than China."I am surprised China has not dropped more," Rogers told CNBC.com.Asked if the US should be worried about this trend, Rogers, who does not hold US Treasurys, said: "Of course. The US should be worried about everyone lightening up – not just China."The cut in foreign holdings could force the government to make higher interest-rate payments, just as it is struggling with big budget deficits.Asked if the trend of unloading US government debt was likely to continue, Rogers said: "Probably after this euro scare is over – which may take a good while."Uncertainty about the size and extent of the euro zone's debt problems weighed on the euro Wednesday, despite a firming of the single currency on Tuesday on optimism that Greece will find ways to cut its deficit.

Now... about that ‘recovery’... It’s true that there are some signs of “stabilization.” The unemployment rate is not getting badder as fast as it was a few months ago. And house prices seem to have stopped falling — for the moment. It’s also true that the economy managed to register positive ‘growth’ in the last quarter... mostly thanks to government spending and inventory restocking. The trouble is, all of these things are consistent with a depression — especially a depression that the feds are fighting every inch of the way. In the 1930s, there were several years of growth... and there were great years for the stock market too. Then, things fell apart again. The nation ended the ‘30s not one penny richer than it had been when it began them. And Japan has seen some good years and some bad years, too, since its depression began in 1990. Oddly, Japan’s population is falling... so in per capita terms, Japan’s downturn hasn’t really been so bad. Per person, the Japanese got richer over the last 10 years.

It’s also true that we use the term ‘depression’ a bit differently than most economists. Most economists believe GDP growth represents increasing prosperity. They think a depression is merely a recession, with negative GDP growth, that lasts longer and goes more deeply than normal. Our definitions are better:A recession is a pause during a period of growth. A depression marks the end of the period of growth... giving the economy a chance to make adjustments so that a new period of growth may begin. GDP growth alone is a fraud. The gross number just doesn’t tell you anything worth knowing. It doesn’t really matter how fast an economy is growing. What counts is how fast it is growing per person... and whether that ‘growth’ is real or phony. Growth is not the same as prosperity... Someday, we promise you, modern economists will be ranked below doctors who bled their patients to death and jungle tribes who threw maidens into volcanoes. They are quacks. These imposter economists think they can fix a recession and prevent a depression. When the private sector stops spending they urge the public sector to step in and replace the missing private spending. That, in a nutshell, is Keynes’ theory. A nutshell is the appropriate container. Because there’s a world of difference between private spending and government spending. Private spending is voluntary; people choose to spend their money on things they really want. When the government spends, on the other hand, it is merely squandering stolen property. It may look like private spending. But it’s not at all the same thing. You can hand out checks to people; it’s not the same as when people earn money. You can build bridges and airports too... but they are only valuable to the extent that they are used efficiently. And you can hire all the government employees you want; they don’t necessarily add to the sum of human happiness or wealth (most likely they subtract from it!). Just look at societies that put everyone to work. There was no unemployment in Cambodia under the Khmer Rouge! Or in the Soviet Union. North Korea is another good example today. They all show that putting people to work for the government doesn’t make them rich... it makes them poor. Yet, these modern economists — Martin Wolf at The Financial Times, Paul Krugman at The New York Times, Bernanke, Summers and Geithner in Washington — believe that they can control and cure a depression. All they have to do is to keep the GDP expanding... and keep unemployment from rising. How? Just spend money! The GDP calculators can’t tell a phony expense from a real one. Whether the government spends money to do something that is not worth doing... or hire someone who is not worth hiring... or just gives away money to someone who is not worth giving money to... the GDP quants don’t know the difference. They think one dollar spent is as good as any other... ... Even if it is a dollar that didn’t exist! (Don’t get us started on that one... ) And who knows if a job is worth doing? Only the person who pays for it. That’s the trouble with government employment; the people who pay the bills don’t make the hiring decisions. Modern economists don’t even bother to think about it. All they care about is the unemployment rate... not about whether the job is actually useful or efficient. Want to boost the job rate? Easy. Just hire people. Does this make people better off? Of course not.

The Financial Times had a full page in its Wednesday edition devoted to China’s empty towns. Bloomberg has been on the story too. It is the story of what actually happens when government meddles in an economy. Last year, China ordered its banks to lend money to infrastructure programs in order to offset the worldwide financial meltdown. The banks responded, doubling their lending. Observers in the West were stunned... and envious. If only we could ‘get things done’ like that, they lamented. If only our governments had more authority and control over the economy! But let us go back a year and put ourselves in the shoes of the bankers. They must have had loan requests. Some of them they must have judged worthy of funding, others not. But how was it possible that the number of project deemed creditworthy doubled in the space of a few months? Well, it didn’t happen. Instead, the Chinese government merely changed the rules of the game. The banks, under pressure to loan out money, reacted by lending it out... to marginal projects. Now, we’re beginning to read about them in the paper — mostly towns without any people. Just wait until China blows up. Then, we’ll read about banks without money. Stores without customers. And businesses without a prayer.

Another tidbit from the FDIC’s report: Bank lending last year dropped at the biggest clip since 1942.Of course, in that year, the entire economy was shifting to a war footing. So it’s safe to say what we’re seeing now is another unprecedented postwar occurrence. The report confirms data released by the St. Louis Fed earlier this week that show commercial and industrial lending have fallen off a cliff.As long as banks can continue to borrow from the Fed at 0.25% and park it in 10-year Treasuries for nearly 3.7% (and leverage it up, of course), we don’t see this changing much.

“The bullish action last week in almost ALL asset classes confirmed temporary price stabilization, at minimum,” Alan Knuckman explains from his post in Chicago, “and possibly a march back to recent multimonth highs.“Good signs across the board include crude oil rising up to over $80 a barrel and almost 15% off of the three-month lows seen just two weeks ago. This rally signals continued strength in the global recovery via demand support that is poised to test January highs at $85.“Take a look at crude oil and the broad market S&P over the last month:“Every major asset sell-off attempt to break the uptrend established from the March 2009 extreme market lows has rebounded with new relative highs.”

The Gallup polling firm has stumbled upon its own BS detector for unemployment figures from the Labor Department. 19.9% of people surveyed last month say they were unemployed or underemployed. That would be equivalent to an official unemployment rate of 16.5%.The American people themselves say the government’s broadest measure of unemployment undercounts by a factor of about 20%.Gallup’s figure comes within a respectable distance of the real-world estimate compiled by John Williams of 21.2%.Where is all this headed? Marc Faber has gone a step further with his forecast that “all governments will eventually default, including the U.S.” He laid out the prospect of a “dirty war” this week in Tokyo, during a speech delivered to 700 managers of hedge funds and pension funds."What are you going to do when your mobile phone gets shut down or the Internet stops working or the city water supplies get poisoned?”“When I tell people to prepare themselves for a dirty war, they ask me: ‘America against whom?’ I tell them that for sure they will find someone.”Faber has long seen war as the ultimate distraction from debts that can’t be repaid… and he said specifically the U.S. budget deficit will remain above $1 trillion a year. (The Obama administration says it’ll get back below that figure by fiscal 2012.)

Introduction: Lew Rockwell is a seminal proponent of the modern free-market movement and a chief orchestrator of the Austrian economic resurgence in America and abroad. Rockwell was Ludwig von Mises' own editor in the 1960s and later served as Congressman Ron Paul's chief of staff. He is founder of the Auburn, Alabama-based Mises Institute and the highly successful blog LewRockwell.com. Together, these entities are among the highest- frequented free-market Internet sites in the world.Daily Bell: You have almost singlehandedly led a revolution in thought that has changed the world. How does that make you feel?Rockwell: Well, thank you, but that's not how ideas work. Without donors, faculty, students, collaborators, distribution media, and the division of labor, we are all just isolated scribblers. That has always been true, from the ancient world and today. We like to say that one person can make a difference, but it is only true to some extent. All forms of production, including in the world of ideas, require as much cooperation with others as possible. And while we were making great progress before 1995, the advent of digital media has made a vast difference precisely because it has dramatically expanded opportunities for communication and cooperation.Daily Bell: Can you familiarize our readers with the depth and breadth of the organizations you have founded and that offer services - especially on the ‘Net.Rockwell: I founded the Mises Institute in 1982 to try to make sure that the influence of Mises and other Austrian economists would grow. Today Mises.org is the largest economics website on the planet that is not-for-profit, and a teaching and publishing powerhouse. I founded LewRockwell.com in 1999, mainly because I had lots of information to share with others, and I got tired of using email lists. I figured that I might as well post what I found interesting, in every area, on a public website. Today, it is the best-read libertarian site on the web. Daily Bell: Did you ever dream of this level of success?Rockwell: Neither I nor any of my mentors, like Rothbard or influences like Mises, could have imagined such a thing. Of course, reaching minds is what liberty is all about. The default position of the world is despotism. In the sweep of things, liberty is the exception. What makes the exception possible is ideological work, that is, spreading the ideas through every possible means.Daily Bell: You attribute some of your success to your father. Can you tell our readers about this unique man?Rockwell: He was a surgeon and a man of great strength of character, a man of the old world of the sort we hardly meet anymore. He wasn't a complainer, didn't whine when things didn't go his way. He was incredibly smart, and he loved liberty in the way that the men of the Enlightenment loved liberty: he didn't believe that the state could do anything better than people can do for themselves. He was a man of the Old Right who despised FDR, in whose deliberate war my older brother was killed, and an admirer of Robert Taft, not least because of his non-interventionist foreign policy. My father worked hard until the last moment he possibly could. So should we all.Daily Bell: Can you provide us with a brief history of how you became interested in free-markets and decided to make them your life's work?Rockwell: As with most people, it began with the observation that something was profoundly wrong with the conventional wisdom, which even from grade school seemed to presume that wise masters at the top knew more than anyone else and so should be in charge of everyone and everything. That supposition seemed to lack empirical evidence, so far as I could tell. I discovered the literature of freedom hiding in the library and realized that truth was something I would forever have to dig for. It wouldn't be given to me by network news anchors, politicians, nor the leading lights in establishment academia. When I discovered what was true, I could not resist acting on it, and telling others. It really isn't any more complicated than that.Daily Bell: Is the logical outcome of Austrian economics the disappearance of the state?Rockwell: Mises didn't think so; neither did Hazlitt. Sudha Shenoy argues that of all the people who entertained the possibility of society without a state in that generation, Hayek comes closest to embodying the anarchistic temperament. In any case, the man who made the real difference in the Austrian School in this regard is Rothbard. It was he who pushed the theoretical apparatus "over the edge," so to speak. Hardly any modern Austrian today is not an anarchist. This is also thanks to Rothbardians such as Walter Block, Hans-Hermann Hoppe, and David Gordon, of course. At one time Rothbard was denounced for his views, for having allegedly marginalized the School. Now, of course, his anarchism is probably the largest part of the legacy he left for the world. It is very appealing to young people, unlike the statism of regime economists.Daily Bell: Is it reasonable to believe that the state will ever wither away or does reality instruct us that the best that can be done is to limit its power?Rockwell: To me, that's like asking if we can imagine a society without robberies and murders. Maybe it won't ever happen, but we must have the ideal in mind or else we'll never get closer to it. Without the ideal, progress stops. To some extent, then, whether reality will finally ever conform is not the critical question. What counts is what we imagine can and should exist. I like to imagine a society without legally sanctioned aggression against person and property.Daily Bell: Are you worried that your organizations will come under significant attack as the free-market movement continues?Rockwell: No, I don't worry about it. On the other hand, it is completely normal for radicals to be under attack from every quarter, so this would not be a surprise.Daily Bell: Take us back in time. You founded Imprimis. Were you bitter when you left?Rockwell: Not at all! I admired George Roche, and still do. But my work at Hillsdale was done, and I moved on.Daily Bell: When did you decide to found the Mises Institute? Was it when you became allied with famous Austrian economist Murray Rothbard?Rockwell: I had been Mises's editor at Arlington House, Publishers, in the late 1960s. After his death in 1973, it became increasingly clear to me that no idea in this world stands a chance for success without an infrastructure of support. Misesians did not have that in the universities nor think tanks. Mises himself dealt with the lack of support by leaving Austria and moving to a wonderful institute in Geneva. I wanted to found an institute in the United States that would be a sanctuary for free thought in the Misesian tradition. First I approached his widow, Margit von Mises, who gave me her blessing and agreed to serve as our first chairman. Then I asked Murray, whom I had also known, to guide our scholarly affairs. He was thrilled as well. He was a natural ally not only because he was Mises's greatest student, but also because he was being shunned as too extreme, too radical, insufficiently willing to play the game -- just as Mises had been. I take very seriously his example, and the trust he reposed in me by making me his executor, and executor. In many ways, he was the critical force behind our growth and success. His spirit still surrounds us today.Daily Bell: What would Rothbard think of what has happened? Would he be surprised?Rockwell: Well, mostly he would be thrilled. But remember that he was the greatest optimist for liberty. He was filled with hope and hated despair. Nor was this just a disposition. It was real hope rooted in the firm belief that if we did the right thing, we could make a difference. In this sense, I don't think he would be surprised that we have more student applications than we can accept, that more and more scholars seek us out, that our Member programs sell out, that our audio files are being downloaded by the millions, that our books are selling faster than we can print them, and all the rest.Daily Bell: There has been a resurgence of Randism. Are you surprised? Do you approve?Rockwell: I met her and heard her lecture, and was always impressed. Recall that when Atlas Shrugged came out, Mises and Rothbard both wrote glowing reviews. Her works of fiction are profoundly effective in promoting the capitalist message, and this is all to the good. But there are some critical errors. I don't think she fully understood the cooperative nature of the capitalist social order, for example. She had less regard for the consumer than the capitalist, and in this respect she was only half right. But in general, if her books can disabuse people of canards against the free economy, that is great. Daily Bell: Can you give our readers a very brief overview of Antiwar.com and how it is related to your enterprises, if at all?Rockwell: I would say that AWC specializes in one aspect of Rothbardian thought. But while it is an ideological cousin of LRC and Mises.org, there is no direct relation. Rothbard's children are everywhere, of course. One reason has to do with his special way of communicating with people. He spoke to anyone at length about his or her own intellectual interests. If you loved news, he would talk news. If you love the history of ideas, he would talk the history of ideas. If you were dedicated to the partitioning of Belgium, he would talk to you about this cause. He was a gigantic personality and intellect. No one penchant or interest or cause can sum up his life.Daily Bell: How is fund-raising going? Has it diminished since the financial crisis?Rockwell: Not at all. If anything, people are even more dedicated to the idea of freedom and the propagation of the truth. Austrian ideas are getting far more attention than ever before, in the wake of a crisis that conforms so closely to the Austrian paradigm. Daily Bell: Are you seeing a steady increase in people willing to fund free-market efforts?Rockwell: Here too, we see great progress.Daily Bell: What is the future of the Ron Paul freedom movement in your view?Rockwell: This much is clear: the Paul movement has made a huge difference in bringing people to libertarian ideas. In some way, there is an element of tragedy in that it takes politics to wake people up. Ideally, people would discover the ideas of liberty through other means. Ron Paul agrees with this observation, by the way. He sees himself as an educator first. He chose politics because, for him, it was an effective route for his larger and more important goal. And what an extraordinary job he has done, in his writing and speaking and personal example for almost four decades. He has brought vast numbers of people into the light. That was always his dream. I should add that his early support was very important in the Institute's success. We are honored to have him as our Distinguished Counselor.Daily Bell: Will your educational organizations become more involved in political efforts or not?Rockwell: I would say no to that. Unless you are Ron Paul, politics is a dangerous business, and tempts people to say and do crazy things. Success is fleeting, whereas we are in this for the long term.Daily Bell: How is the free-market movement spreading overseas?Rockwell: Wonderfully. One might compare Austro-libertarianism to Marxism in the extent of its international reach. This is very exciting. Human liberty is a universal desire, so of course there can be no libertarian movement that isn't truly international.Daily Bell: Are you hopeful that growth will continue at the pace that it has over the past decade?Rockwell: The future is always uncertain, but we have the tools and the energy and the ideas. Just in the last few years, we brought back to print virtually the whole of the Austrian and libertarian libraries. Our downloads are immense, especially among young people. If you must predict the future, look to the ideas held by young people and you will come close to finding it. In this sense, I'm certain that our movement will continue to grow long past my own life.Daily Bell: Have you noticed increased resistance to your efforts coming from organized governmental entities?Rockwell: One hears rumors, but nothing is known for sure. Government these days has many enemies, and all the usual bureaucratic problems in keeping up with them all.Daily Bell: Where does the US government and its allied power structure go from here? We think they are bleeding credibility and influence.Rockwell: Yes, and compare today's anti-government feelings with the way things were just after 9/11/01, a massive state failure the state used to promote itself. Today we see anti-state feeling growing, picking up where it left off in the 1990s. But here is the problem. The left hates some aspects of the state and loves others. The right is the mirror image. The job of the libertarian is to get both sides to see that the other guys are half right. Think of the Tea Parties, for example. The crowds roar disapproval of socialism even as they cheer for socialistic military invasions.Daily Bell: Is it possible to return the United States to a more republican form of government? Can history be repealed?Rockwell: We have a history as a radically decentralized nation, and this memory has not entirely evaporated. It could be that the path to liberty in the U.S. is nullification or even secession. And I am looking forward to Tom Wood's forthcoming Nullification Handbook. Or the decentralization may be de facto as more and more people discover means of individually seceding from specific sectors of statism: using alternative currencies, homeschooling their children, reading alternative media, circumventing the pharma-industrial complex, starting an unofficial business, smoking whatever substances they want, or refusing to return to a military assignment. Rebellion can take many forms. We have to learn to welcome them all.Daily Bell: Do you expect in your lifetime to see gold competing with the US dollar as currency.Rockwell: Technology makes this possible as never before. Gold is not going away, but the dollar's life is limited.Daily Bell: Do you expect the Fed to be audited?Rockwell: This might happen, though as Ron Paul notes, transparency is only one step towards what must be the ultimate goal: shutting down the central bank.Daily Bell: What do you think of Ellen Brown's theory that the state historically has created money, and that banks, including the Fed, ought to be nationalized and operated by "the people's" government. Some say that the oversight that Ron Paul wants Congress to have over the Fed is somehow an endorsement of the Brownian position.Rockwell: I am not very familiar with it, but the Fed is the government's central bank, the audit bill gives no monetary power to other parts of the government, and the banks are already in cahoots with the regime. That's why we have a Fed and officially enabled fractional reserves.Daily Bell: We are well aware that Ron Paul seeks a gold standard and in a perfect world the end of the Fed. Can you reaffirm this position for our readers?Rockwell: Yes, though he does not seek a monopoly for anything, including gold. He wants money to be rooted in market experience. It is not complicated.Daily Bell: We have noted what we think is a softening of an institutional position regarding the gold standard - and the possibility that free-banking would be a considered option as well. Is this a correct observation of your organizations' stance?Rockwell: I wouldn't say that we have an official position. There are many ways to move to free-market money and non-inflationary banking. I would never want to close off any viable path. One problem with the Misesian plan for a gold standard is that it relies on the idea that the people in charge will do the right thing. This is a charming, old-world idea, but I don't think it holds true in our times. We need to be open to the possibility that reform will never come from the top.Daily Bell: Are you sympathetic to a private gold-and-silver standard or is a gold standard always preferable?Rockwell: I am all for competing metals. But a true specie standard is always private, and it always leaves room for competing currencies.Daily Bell: One of the hardest issues to resolve from a free-market point of view is ownership of intellectual property. Can you tell our readers where you come down on this difficult issue? In a free-market, would individuals be able to claim and enforce intellectual property rights with any prospect of success?Rockwell: Rothbard condemned patents but not copyrights. Mises and Machlup saw patents as government grants of monopoly, but neither condemned them outright. Hayek was against copyrights and patents, but didn't write about them much. It is digital media that have brought the issue into focus. The key thinker here is Stephan Kinsella. He and Jeffrey Tucker have done the heavy lifting and convinced most all of us that intellectual property is an artifice that has no place in a market economy. There are incredible implications to this insight. The infinite reproducibility of ideas means that we stand a great chance for success. The fact that ideas are not scarce goods means that they need not be controlled. This is a wonderful thing. There is much work left to do in this area. The whole history of invention needs revision, and our theory of markets needs to take better account of the central place of emulation in social progress.Daily Bell: Do you think the military industrial complex in the United States will gradually erode as the free-market movement gathers even more strength, or is the power structure hell bent on empire?Rockwell: It has to erode. The empire is insanely overextended. At some point, we'll go the way of Britain and Rome. We can only hope that the U.S. takes this path in wisdom and not in desperation. Daily Bell: Where do you go from here? Do you have other organizational changes in the works? Expansions?Rockwell: There are expansions every day. We are looking at marvelous things, things that are bigger than anything we've yet done. But I don't want to spoil the surprise.Daily Bell: What is your future personally? What intellectual endeavors are you focused on?Rockwell: I want to keep working, especially on my website, and to keep pushing the boundaries of ideas and technology. I never plan on retiring, and neither should anyone else. There is too much work to do.Daily Bell: Can you give our readers any advice as to what publications and information to seek out on your web sites - where do they start?Rockwell: We always begin with our passions, whatever they are. No two people are alike. This is what search engines are for. But let me say that at some point, everyone should aspire to be a serious student of Mises and Rothbard. No education is complete without that. Daily Bell: If readers wish to learn more about your organizations, where is the easiest starting point? Can anyone attend Mises seminars, etc?Rockwell: The websites are a great starting place, but of course we love to have new people come to our conferences. We are working to create more opportunities for that.Daily Bell: Where would you recommend that a young person go for higher education in the United States?Rockwell: You mean education or college? They aren't always the same. You can get a good education online today. For university degrees, I would suggest the least-cost investment. But remember that the opportunity costs of formal education are very high. After four to six years in college, a person can discover that he or she has no skills. This is the worst way to enter a workforce.Daily Bell: Thank you for your time and insights.Rockwell: You're welcome.

Obama Giving Black Farmers $1.25B in ReparationsSunday, 21 Feb 2010 09:55 PMBy: Theodore KettleBlack farmers – possibly over 70,000 of them – will get cash payments and debt relief from the federal government totaling $1.25 billion, in reparation for alleged racial discrimination suffered under the Department of Agriculture’s loan programs, the Obama Administration has agreed.The president announced the deal on Thursday, applauding Agriculture Secretary Tom Vilsack and Attorney General Eric Holder for “bringing these long-ignored claims of African American farmers to a rightful conclusion.”The Washington Post called the settlement “part of a wider effort by Obama and senior officials to dispense with lawsuits stemming from America’s checkered civil rights legacy.”House Majority Whip and Congressional Black Caucus member James Clyburn cheered the deal. “History has taught us to never give up when fighting for what is right,” he said in a statement. “What happened to these black farmers was wrong, and we now have the opportunity to make it right.”Clyburn said, “I thank President Obama for his leadership on this issue” adding that “I especially want to congratulate my colleagues in the Congressional Black Caucus for keeping the focus on the plight of black farmers.”Congress, as well as a federal judge, will have to approve the deal. The Justice Department told the Post that claims up to $50,000 will be able to be made to the government through a streamlined process, while larger claims will require more detail in the evidence a victim provides of government discrimination. The charges made by thousands of black farmers, with culpability finally accepted by Washington, accuse the USDA of decades of racist practices.That $1.25 billion is only a fraction, however, of the sum that the reparations movement has called for to compensate for all the injustices committed against blacks in American history. The National Legal and Policy Center some years ago examined slave reparations activism and found one proponent calling for the federal government “to pay $500,000 to every slave descendant,” which would total “more than $15 trillion and require a surtax of roughly $50,000 on each non-African American man, woman and child in this country (the median family income is not even that high).”Another estimate from a 1990s Harper’s magazine article calculated that reparations would cost $97 trillion – based on 222,505,049 hours of forced labor between 1619 and 1865, plus 6% compounded interest.Pointing to “the staggering breadth of America’s crime against us,” TransAfrica founder Randall Robinson in his book, “The Debt: What America Owes to Blacks,” argued that “Solutions must be tailored to the scope of the crime in a way that would make the victim whole. In this case, the psychic and economic injury is enormous, multidimensional and long-running. Thus must be America’s restitution to blacks for the damage done.”According to the reparations mindset, therefore, President Obama’s $1.25 billion for 70,000-plus black farmers is hardly even a beginning.

The U.S. Department of State (DOS) estimates that more than six million U.S. citizens live outside the United States. But no one knows for certain—and it's likely the numbers are higher than the DOS estimate.Back in 2004, the Census Department tried to make a head count of Americans living in Kuwait, Mexico, and France. They gave their effort the catchy name of the "Overseas Enumeration Test." Perhaps that's why the program was such a colossal failure. For instance, the DOS estimates that approximately 300,000 Americans live in Mexico. Groups representing Americans living overseas say the number is closer to one million. But only 250 Americans completed the Census form. Clearly, at least some of the remainder had no desire to be "enumerated."But even if the DOS doesn't know how many Americans really live abroad, there's another agency that wants to find out: the Internal Revenue Service. As part of its continuing crackdown on U.S. taxpayers with offshore dealings, the IRS has cranked up its tax enforcement efforts for Americans living abroad.Apparently, it believes that a large number of the millions of Americans that live offshore aren't paying U.S. taxes. And, they're probably right. Many U.S. citizens living abroad honestly don't believe they were subject to U.S. tax since they were paying taxes where they lived. But since the U.S.—alone among major countries—imposes tax on the basis of citizenship, Americans living abroad must file tax returns, too.For more than a decade, the IRS has been trying to figure out how to force these non-resident citizens to start paying tax. One prong of this effort is its ongoing crackdown against offshore banks with U.S. correspondent accounts. The IRS demands that these banks enter into one-sided "qualified intermediary" agreements that force the banks to disclose the names of their U.S. customers. In response, many offshore banks simply closed the accounts of all their U.S. customers—even those living offshore.But now, the IRS is going further. Back in 2001, the IRS commissioned a study of an obscure international agreement called the "Hague Convention on the Service Abroad of Judicial and Extra Judicial Documents in Civil and Commercial Matters." Basically, the IRS wanted to know if it could issue a demand for information in the United Kingdom that would be enforceable through U.S. courts. Its legal analysis concluded that it could. In other words, once the IRS has completed some procedural formalities, it can serve notice to a U.S. citizen living in the U.K. with a legally binding demand to produce documents, testimony or other information.I'm not aware of the IRS using the Hague Convention in this manner until very recently, but I've now learned that the IRS has issued administrative subpoenas in both the U.K. and Switzerland. Their initial targets appear to be wealthy Americans and European businesses preparing U.S. tax returns. In addition, the IRS is using the information exchange provisions of a new "joint tax shelter" initiative to obtain tax return data from the Inland Revenue, the U.K. tax authority. Besides the U.S. and U.K., the other participants in this treaty are Australia, Canada, and New Zealand.If you're an American livi abroad, the IRS has you in its sights. This is particularly true if you live in the U.K. or Switzerland. If you live in a country that doesn't have a tax treaty or tax information exchange agreement with the U.S., your immediate risk is probably somewhat lower. However, if you haven't been filing tax returns annually with the IRS, you need to begin doing so—pronto.I think this strategy could easily blow up in the face of the IRS. Yes, it may force wealthy Americans living abroad to fess up and begin paying tax. But, I suspect a lot more Americans—particularly those who have lived abroad most of their lives, or have never even set foot in the USA—to simply give up their U.S. citizenship and passport. It could also lead to fewer and fewer wealthy foreigners being willing to invest in the United States. Neither development can be healthy for the U.S. economy—or the U.S. dollar.

Social Security is in trouble. According to the Social Security Trustees Report, the Social Security program was in a $7.7 trillion hole as of January 1, 2009. That means Washington would have needed $7.7 trillion on that date, invested at prevailing rates, to deliver for the next seventy-five-years on the promises that the federal government has made. But we actually need much more than that to keep Social Security healthy, because it will experience larger and larger deficits both in the near future and beyond the seventy-five-year accounting horizon. As of January 1, 2009, that number - the amount we would need to invest to ensure the sustainability of the program for seventy-five years and beyond - was $15.1 trillion. How much of this huge sum do we have invested in real liquid and transferable assets today - that is, how much in actual money? Zero, zip, cero, nada, nothing!The truth is that the government's Social Security guarantee is one huge unfunded promise. How can this be? I have mentioned the Social Security "trust funds," where our payroll taxes go. All this money is transmitted to the federal government and credited to the Social Security trust funds. You would logically assume that these funds would have hard assets that have been saved and invested to cover the program's future costs. However, rather than saving the money and investing it in a diversified pool of real and readily marketable assets, the government spends it and provides "special-issue" government securities in return.Just consider what actually goes into those funds. First there are the numbers reported in government financial statements. According to those numbers, Washington had issued approximately $2.4 trillion in special- issue US government securities that had been credited to the Social Security trust fund as of January 1, 2009. The computer records documenting these securities are held in a locked file cabinet in West Virginia. But there is a reason they are called special-issue securities, and it's not good. Unlike regular government bonds, which people like us and the Chinese government can buy, these special-issue bonds cannot be sold; in other words, they are government IOUs that the government has issued to itself, to be paid back later - with interest. Imagine if you or I could sit around writing IOUs to ourselves that were worth something. Great way to make a living.Washington says that we can count on these bonds because they are backed by the full faith and credit of the United States government, which guarantees both principal and interest. But - believe it or not - under current federal accounting principles, the government does not consider these bonds to be liabilities - which is another way of saying the government doesn't really think that it's our money.Think about that for a minute. If you or I lend the government money by buying a bond, the government has to pay us back with interest. In other words, that bond is a government liability. But when it comes to the Social Security trust funds, the government is saying the special- issue securities it deposits are not a liability - in other words, they're basically worth nothing at all. Now get this: The trust funds report these securities as assets on the annual reports that they provide to the public. Does that sound like wanting to have your cake and eat it too? Con artists of the world, I hope you're taking notes.In my view, these bonds should be treated as liabilities, and their value should be counted as part of our debt-to-GDP ratio. After all, they are backed by the full faith and credit of the federal government, and I do not believe the federal government will default on them.Under the current scheme, the Social Security program has been running large surpluses since the reforms of 1983. But in actuality, Washington has spent those surpluses every year on other government activities. That is one way the government can reduce its public borrowing and keep interest rates down.To say the least, the federal government's accounting for these funds understates both its total liabilities and its annual operating deficits. That brings us to another clever bit of Washington wordsmithing: the "unified deficit." In public reporting, the government takes the real operating deficit, $638 billion in fiscal 2008, and subtracts the nonexistent amount credited to the Social Security trust funds, $183 billion in fiscal 2008. This "unified" figure - $455 billion - makes the federal budget deficit seem smaller than it actually is. And they have been doing this for many years.These accounting tricks would never be allowed in the real world, where trust funds are subject to stringent accounting rules and fiduciary standards. In essence, Washington is playing a massive con game - collecting your Social Security taxes, spending that money for its own purposes, and accounting for it in trust funds that are largely a fiction. A more proper description would be "trust-the-government funds." Or as my boss, Pete Peterson, would say, "You can't trust them, and they aren't funded." Just another example of how words used in Washington don't have the same meaning they have in Webster's dictionary.Don't worry, the reforms of the 1980s are still keeping the system above water. Monthly benefits should be paid in full for at least another three decades. However, the Social Security program will begin to pay out more than it takes in much sooner than that. The retirement and survivors income program expects its payments to exceed its revenues in 2010 and 2011. That will happen because revenue has declined during the recession -while at the same time, more people are retiring. When the federal government has to start cashing in the special-issue securities in the trust funds in order to pay benefits, it will have to raise taxes, cut benefits, and/or sell real bonds to the public in order to raise real money for retirees receiving benefits. If the government issues more public debt - in part to attract more foreign investors - that will likely increase our foreign dependency.

Charlie Munger (pictured left with Buffet), Warren Buffett's longtime business partner in Berkshire Hathaway, warns in a new column that the U.S. economic empire is crumbling before our eyes, thanks to federal debt and poor planning. In an article penned for Slate.com, Munger uses the form of a parable to explain how Wall Street's love affair with gambling has destroyed America's Main Street. The article leads with this headline: "Basically, It's Over." The Berkshire Hathaway vice chairman describes the economic history of Basicland, which happens to match U.S. history. Early in its history, debt is unknown except for home mortgages and some consumer loans, and people live within their means. Speculation is discouraged, and commodities markets are small and tightly regulated. Under this rational system, economic growth skips merrily along at a steady 3 percent, Munger explains. Taxes are limited and pay for only "essential services" like fire protection, courts, and defense. Most taxes are collected on imports, and government spending matches that tax income. Debt via government bonds is limited. Then things take a turn for the worse. - NewsMaxDominant Social Theme: Basically, blame Wall Street.Free-Market Analysis: Here at the Daily Bell, we like to take a somewhat longer-term view. We think the course of humankind is somewhat circuitous, an argument between those who would control society for their own ends and a larger mass of humanity that simply seeks to live freely and realize their dreams. Thus, we find ourselves somewhat unsure about Mr. Munger's analysis. He seems to blame the difficulties the US is facing on the casino culture of Wall Street. But we wonder if it so simple. Here's some more of Munger's analysis:"The extreme prosperity of Basicland had created a peculiar outcome: As their affluence and leisure time grew, Basicland's citizens more and more whiled away their time in the excitement of casino gambling," Munger writes.Financial services soon grow to account for too big a portion of the economy, Munger says. "The winnings of the casinos eventually amounted to 25 percent of Basicland's GDP, while 22 percent of all employee earnings in Basicland were paid to persons employed by the casinos, many of whom were engineers needed elsewhere."Then, a shock: Imported energy costs rise, and low-cost labor competition from abroad appears, Munger writes."Suddenly Basicland had to come up with 30 percent of its GDP every year, in foreign currency, to pay its creditors," Munger writes. The U.S. deficit - just the gap between spending and income in one year - is projected to hit $1.6 trillion in 2010. Total debt is project to exceed 100 percent of GDP starting in 2011.In the parable, Munger strongly suggests that the United States take seriously the campaign of Reagan-era Fed Chairman Paul Volcker, who wants the big banks to cease pretending to be banks if they expect the freedom to trade securities on the side."He suggested that Basicland should strongly discourage casino gambling, partly through a complete ban on the trading in financial derivatives, and it should encourage former casino employees - and former casino patrons - to produce and sell items that foreigners were willing to buy," Munger writes. As the parable ends, none of the politicians listen, and Basicland turned into "Sorrowland," Munger concludes.The problem with Munger's point of view - from OUR point of view - is that is seems to leave out a lot of pertinent history. We would argue that the problems America faces go back a long ways. They have to do in fact with the creation of the Federal Reserve, the graduated income tax, the growth of the federal government, the empowerment of the executive branch, the loss of power of the states (which began after the Civil War) and the rise of America's mighty military industrial complex which has supported the generation of nearly 1,000 military bases around the world.America is truly an empire, though one can make the argument it is a bifurcated empire that includes Britain as well. One can also make an argument that an intergenerational power elite has worked patiently to hollow out what once was a republic with an eye toward creating a larger, international structure supported by America's military might. It is this perspective that we find lacking in Munger's parable.When one examines the arc of Anglo-American history more closely, it is almost indisputable that America's and Britain's current situation did not occur by happenstance. It is the product of intensive labor by those who sought to consolidate power and wealth into fewer and fewer hands. The idea that Wall Street is to blame for the current state of affairs is simplistic in the extreme, we would argue. The problems that America faces go back at least a century or more. They began, in earnest, in fact, with the Civil War and the loss of the right of secession. Once the federal government had established primacy, the damage was essentially done.Conclusion: We find it somewhat facile to maintain as Munger does that one can ban derivatives and otherwise tinker with the system - and then it will work again, at least after a fashion. In fact, we think that this perspective merely touches the surface of what is necessary. Basically, money must be returned to the private market through the kind of free-banking approach that was once the law of the land. This would of course include freely circulating gold and silver. This would go a long way to starving the US's vast regulatory democracy - including its bloated military and intel structure - one that spawns only more corruption and ruin every day. These would be substantive changes from our point of view. Munger's we would argue, would not.

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